Institutions and markets in the human development approach

The human development and capability approach brings the ‘institutionalist’ school’s analysis of institutions into line with its overall objective of development. Institutions, and the functionings of markets, should ultimately

be seen in terms of the expansion of valuable freedoms. Like institutional economics, it stresses the interdependence of institutions, formal and informal, market and non-market related:

Individuals live and operate in a world of institutions. Our opportunities and prospects depend crucially on what institutions exist and how they function. Not only do institutions contribute to our freedoms, their roles can be sensibly evaluated in the light of their contributions to our freedom . . . Even though different commenta- tors have chosen to focus on particular institutions (such as market, or the democratic system, or the media, or the public distribution system), we have to view them together, to be able to see what they can or cannot do in combination with other institutions. It is in this integrated perspective that the different institutions can be reason- ably assessed and examined. (Sen, 1999, p142)

Development calls for the use of many different institutions – the market, the public services, the judiciary, the political parties, the media and so on. These institutions can often supplement and also complement each other. Since freedoms of different kinds contribute to one another, a freedom-centred view calls for an institutionally-integrated approach. [There is a] need for thinking in terms of a multi-institution format. (Drèze and Sen, 2002, p20).

Development and the expansion of freedoms can therefore not occur without the presence of multiple institutions. For example, the capability of women to read and write can often be deeply hindered by social norms that are hostile to gender equality. The capability of indigenous people to maintain their language and traditions cannot exist without an adequate legal framework that fully protects and implements the rights of cultural minorities. The capability to be healthy and educated is greatly enhanced by the institution of social security and other key welfare institutions.

In Chapters 2 and 5, we argued that one of the reasons why higher incomes were not automatically translated into higher well-being was because of variations in institutional arrangements. Institutional analysis provides a wider framework for analysing which institutions constrain or enhance people’s capabilities and helps us to theorize how change takes place. The specific contribution of the human development and capability approach to this framework is the recognition of the critical importance of political participation in creating and reforming institutions, whether market or non-

INSTITUTIONS, MARKETS AND ECONOMIC DEVELOPMENT

market, so they can provide opportunities for people to live the lives they have reason to value.

The overall objective of expanding people’s freedoms is ultimately the benchmark through which institutions and markets should be seen. For example, Sen (1999, p112) emphasizes the value of the freedom to participate in markets: ‘We have good reasons to buy and sell, to exchange, and to seek lives that can flourish on the basis of transactions. To deny that freedom would in itself (be) a major failing of society.’ But this has to be seen not as an endorsement of the allocation mechanisms of markets but in terms of the agency and well-being aspects of the approach (see Chapter 2). One can think here of feudal societies where people are denied the freedom to buy and sell goods to whomever they wish, or peasants who have to give their harvest to landlords because they have been forced to borrow from them at very high interest rates in order to survive. Similarly, denying people the freedom to transact in labour markets may be another violation of human freedom. When they are forced to work in unfavourable contexts or unable to seek employment of their choice, or when women are forbidden, in certain cultures, to work and receive a salary, their human freedom is violated. That market freedom is valuable does not of course mean that other forms of material provision are necessarily less valuable – i.e. via the state, community and family, with their respective forms of redistribution and reciprocity. What the capability approach emphasizes here is the agency and well-being of people. When the economic system, whatever it is, functions in a way that does not enable people to be agents of their own lives, the system is viewed as unjust. In certain contexts, well-functioning markets can indeed be more just and more conducive to promoting valuable freedoms than traditional forms of material provision, such as feudal or clientelistic relations.

Another reason the human development and capability approach values market freedom is because of its long-term consequences. When markets function well, they can be a good mechanism for allocating resources efficiently – efficiency being understood here as a state in which it is impossible to increase

a person’s well-being without decreasing someone else’s. 3 If, in some contexts, market provisioning is more efficient in enhancing valuable capabilities than state provisioning, it follows that the former is a better choice than the latter. In that sense, the human development and capability approach is neither pro-state nor pro-market, nor does it favour any particular economic system of material provisioning. The essence of the approach is that the success of social and economic processes should be assessed according to whether they expand valuable freedoms. That these processes are state or market-led does not matter, provided that two conditions are met: people’s agency and well-being (of current and future generations) should be both promoted and respected.

However, it is clear from the above discussion that the way markets work is complex because of the many levels of institutions that are involved. It can therefore not be assumed that introducing a market will necessarily promote and expand valuable freedoms because this all depends on the rules and norms

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that operate in a given context. Indeed, since the ways in which they are socially regulated arise from a wide range of inequalities in society itself, markets are, on the contrary, likely to perpetuate these deep-rooted unfreedoms even further. While the basic freedom to participate in markets should not be denied, the question of whether the terms and conditions of people’s access to and participation in markets are in fact equitable must still be carefully examined.

When markets do not promote equity, the human development and capability approach advocates political participation as a way of reforming market mechanisms. The remedy to correct the unfreedoms that market freedoms might generate ‘has to lie in more freedom – including that of public discussion and participatory political decisions’ (Sen, 1999, p123). This demonstrates, however, that the ways in which markets create unfreedoms out of underlying inequalities can have both subtle and far-reaching consequences. While political participation may be a route to making markets equitable, it can sometimes be difficult. This route requires that those who experience market discrimination are able to identify the source of their disadvantage and are able to articulate and mobilize around this in effective ways – or that others are prepared to do so on their behalf. As we have seen, gender inequalities, for example, can be deeply-rooted and multi-layered, which means that it is not always easy to identify their origins and effects since doing so tends to require plentiful resources. While deliberative democracy may appropriately implement laws and regulations to redress these inequalities, the latter may be so deeply-rooted that a change in rules alone remains ultimately ineffective in reversing their effect. Instead, it can take many years – even decades – and requires an investment of resources and a concerted attempt to create strategies that can influence the underlying attitudes and beliefs in a given society.

Box 7.2 summarizes how political participation can influence the functioning of markets when reforms are seen to conflict with the core principles of equity and participation.

Institutions and markets in the human development approach